Crude Oil Plunges on China Interest Rate Hike

Crude Oil ( WTI ) - $80.27 // $0.78 // 0.98%

Commentary: Crude oil got slammed in Tuesday's session after China raised interest rates for the first time in three years. The commodity slumped $3.59, or 4.32%, to settle at $79.49. The Chinese central bank increased its benchmark rate by 25 basis points, sending deposit rates to 2.25% and one-year lending rates to 5.56%. Given how overbought crude oil and risk assets in general had become, this was the catalyst traders were looking for to lock in profits. But the door is quite narrow when everyone is looking to exit as once, thus we saw huge moves across the board.

Fundamentally this does not change things much, but risks are always increased when monetary conditions tighten. China is still in the process of orchestrating a soft landing, and in that regard they have been largely successful so far, but with crude at the upper end of a 1-year range, it's not surprising to see a move lower. As China represents about 40% of this year's global demand growth, it is the single most important driver of oil fundamentals on the demand side. Any notable developments in the country are thus magnified by traders in the short-term, and that's how we got such a large decline.

Our outlook remains the same. Look to buy crude oil on the dips, but we wouldn't pull the trigger until the low to mid-$70's. The global economic recovery is on track and crude oil should stay well bid in such an environment. Gains will be extremely gradual, however, as supply is ample at this time. Thus, active trading is required to outperform.

Technical Outlook: After prolonged consolidation, prices finally made good on a Bearish Engulfing candlestick pattern put in on 10/7, breaking below support at the 23.6% Fibonacci retracement of the latest upswing ($81.20) to pause just ahead of the 38.2% level at $79.21. The 23.6% Fib has now been recast as resistance, with continued selling targeting the 50% level at $77.60.

Commodities - Metals

Gold Gets Pounded on Dollar Rebound

Gold - $1338.95 // $6.90 // 0.52%

Commentary: With the U.S. Dollar advancing sharply versus rivals on Tuesday, it is little surprise that gold got slammed hard. The metal fell $36.40, or 2.66%, to settle at $1332.05.

We have written extensively about how traders have recently been using gold as a vehicle to bet against the greenback. After the latest moves, the one month correlation between gold and the US Dollar stands at -0.96. Gold has also been displaying a strong positive correlation with equity markets, and that pattern held as well on Tuesday. The one-month correlation between the S&P 500 stock index and gold is 0.92.

The latest move in gold and the dollar can be attributed to the Chinese interest rate hike, which catalyzed a reversal in all the established trends as traders locked in profits. Now we will look to see if there is follow through to determine if a meaningful correction is now in the works or whether this was a one-off move.

Technical Outlook: Prices have broken down out of a rising channel in place since late September, meeting support at the 23.6% Fibonacci retracement of the 7/28-10/14 advance ($1332.99). Continued selling from here targets the 38.2% level at $1299.37. Initial resistance lines up in the $1350-$1360 congestion region.

Silver - $23.62 // $0.25 // 1.09%

Commentary: In typical fashion silver acted as a leveraged play on gold, and as the day was an ugly one for gold, it was even uglier for silver. The metal lost $0.96, or 3.93%, to close to $23.37.

The gold/silver ratio now stands at 56.7, near the lowest level since August 2008. (The ratio measures the relative performance of gold and silver. A higher number indicates gold outperformance, while a lower number indicates silver outperformance).

Technical Outlook: Prices reversed lower after retesting support-turned-resistance at the bottom of a rising channel set from late September that was broken earlier this week, taking out the next downside barrier at $23.50. From here, the bears are targeting a rising trend line established from late August, now at $22.83.

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Read more at: Forex @ DailyFX - Crude Oil Plunges on China Interest Rate Hike, Gold Gets Pounded on Dollar Rebound

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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